Rosenthal: As home prices rise, so does economy

Hope grows for recovery with latest housing numbers for Chicago area, U.S. as a whole

June 26, 2013|Phil Rosenthal

Chicago-area home prices are a third lower than they were at market’s high point in September 2006, but they’re up more than 10 percent from the low point of March 2012. Experts say the recent uptick bodes well for the economy. (Heather Charles, Chicago Tribune)

Homeowners who avoided drowning as their single largest investment went underwater in the economic downturn no doubt will want to wait before taking down the sandbags and putting away the snorkel. But the rain cloud that's loomed over the housing market for so long does seem to be lifting.

Chicago housing prices in April rose 9.3 percent from a year earlier, according to a report issued Tuesday by the closely watched S&P/Case-Shiller Home Price Indices. That's the sixth successive month of price increases and, even if it's still almost a third off of what the index says was the market high of September 2006, it's a better-than-10-percent bump from the low point of March 2012.

The local recovery trails the composite figures for the nation's top 20 markets, but up is up. Beats the hell out of down.

As no one who has survived the downturn needs to be reminded, it's best to take stock of all the things that can go wrong. But this is a hopeful start for the housing sector, a sign the overall economy is in fact bouncing back.

"No one was predicting the fall that we had, so no one wants to predict that everything is going to be great and get punched in the face again," said Michael Golden, co-founder of @properties, a Chicago-based brokerage. "We fell hard. We're just starting to climb back out. To think that all of a sudden we're going to fall back down again doesn't make a lot of sense. Our economy is better. There are still issues, but overall things are better."

Golden sees flaws in the Case-Shiller average but doesn't dispute the trend. His take on the Chicago market is that prices peaked a bit earlier and began stabilizing a bit later. High-end neighborhoods and wealthy suburbs have bounced back stronger, as better-heeled buyers who are more qualified lendees have been better positioned to avail themselves of the lower prices and mortgage rates.

"Places on the fringe, they continue to struggle," he said. "There are places where it's going to be a long, long time before it gets back to the levels where it was before."

The buyers who are in the market now have, for the most part, come to realize they need to think of housing as a longer-term investment than perhaps they did when flipping was all the rage. They're pickier, Golden said. A limited inventory of desirable properties and pent-up demand for them is what is driving up prices. Many would-be sellers are reluctant to sell because they believe prices will continue to rise. Others remain underwater and simply don't see selling as a viable option.

Mark Zandi, chief economist for Moody's Analytics, noted that 65 percent of us are homeowners and, for most of that group, the home is the single most important asset they have. That's why it plays such a vital role historically in a recovery.

"It really is self-reinforcing," Zandi said. "You get into these virtuous cycles, and also vicious cycles, which characterize recessions. In a virtuous cycles, you get job growth, which creates more demand for homes. People buy the homes. House prices rise. They spend a little more. Businesses hire a little more. And you get into this self-reinforcing part of the economic expansion."

Typically, rising housing prices are what enable the economy to move from recession to recovery to self-sustaining economic expansion. Because lending practices had put buyers into the market for homes that they couldn't afford, helping pump up the bubble, the housing market was slower to recover. Even those who project employment to recover fully by 2016 or early 2017 see a return to pre-downturn housing prices much further off.

"But now that housing has addressed the issues that plagued it, it's taking on its historical mantle and should be the thing that pushes recovery into a self-sustaining economic expansion," Zandi said. "This is for real and they should get very excited, particularly after five years of straight down."

Paul Ballew, chief economist at Dun & Bradstreet, acknowledged that many of the factors that led to the downturn appear to be behind us, so there's reason to expect some improvement going forward. But he also sounded a cautious note.

"The challenge remains that the road to full recovery is likely to be slow and uneven — and there are risks, including the pivot the Fed has to take by moving to exit its unprecedented stimulus," Ballew said. "So (there is) good news from housing but things to watch out for."

In the short term, Golden said a bump in mortgage rates actually spurs sales because buyers, fearing even greater hikes, get off the fence. But Zandi said that if the Federal Reserve isn't careful and lets interest rates rise faster than unemployment falls, there's trouble.